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Reading Elon Musk's Dogecoin Plan

May 22, 2021 7:20 AM ETBitcoin USD (BTC-USD)ETH-USD
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  • Cryptocurrency has approached to the third transformation.
  • Energy consumption is not only the target Elon Musk has kept his eye on, but also something else such as geopolitics. Dogecoin seems to pass the criteria.
  • NFT, established meaningful digital asset to create its authenticity, has started to set in place. Native digital citizen has made an experiment on living with it.

Dogecoin accepted in Thai restaurant

We cannot predict event that encapsulated "complex adaptive system". The Covid-19 pandemic has spread out worldwide with different patterns in different countries. Some countries may face multiple waves, some may be not. Normally, human being is a creature to be cursed to remember only the history, therefore, he tends to judge the future with his experience. The most precise method to predict the future is to use causal model mixing based on historical data with expert interview (such as Delphi technique), will give only 70 per cent accuracy. Whether the Dogecoin and other altcoins are bubble remain to be seen. In this article, I'll give some qualitative analysis on why Elon Musk has given his attention to Dogecoin, quantitative data will be also presented to reassure the trend.

The Backdrop

Cryptocurrency has been originated around mid 2000s on a prototyping of Digicash by David Chaum. Satoshi Nakamoto has perfected it in late 2010s by building Bitcoin and he just disappeared mysteriously.

Bitcoin has relied on the processor-intensive "proof of work" consensus model, it has consumed enormous energy. The carbon-footprint is as much energy as Norway, and is expected to consume energy equal to the entire European countries. Moreover, as Musk has pointed out on his twitter, Bitcoin is not really "decentralized." China has extensively operated Bitcoin mining more than 75 per cent, among this it has been intensively located in rural area such as Xinjiang (hashrate = 35.76 per cent), Inner Mongolia (hashrate = 8.07 per cent), and Sichuan (hashrate = 9.66 per cent), see data from Cambridge Bitcoin Electricity Consumption Index.

Some analysts may think that China will use Bitcoin mining as its leverage to attack digital money, Central Bank Digital Currency (OTC:CBDC) or cryptocurrency. This idea is so similar to the Chinese government's holding US treasury Bond on its intention to use as leverage. But this is not the case. China's miners have just acted as another outsourcing model in the upstream in the whole cryptocurrency ecosystem. Chinese economy and Western economy are difficult to decouple easily. The Chinese can't simply bear the loss, so do the US and Western downstream economy can't afford high carbon footprint as produced in China. The impact announced by Beijing to curve cryptocurrency trading and mining remains to be seen.

The downside risk is at the psychological panic shot selling whenever the coming quantum computing to break traditional cryptography used in any cryptocurrency becomes true. The recent fluctuating of cryptocurrency from various news is evident.

The Threshold

While Vitalik Buterin has introduced Ethereum, it has also come with a concept of "Lego of cryptofinance" which will allow a possibility of Decentralized Finance (DeFi). The DeFi will permit financial transaction automatically without any intermediary whether we will engage in getting loan, mortgage, investment or any other transaction. With this concept, if mature, it will disrupt the whole physical banking system. Charles Hoskinson, the former co-founder of Ethereum, has created a rival, Cardano. It has sent Cardano's ADA in the top five cryptocurrency in term of market value after Bitcoin (BTC), Ethereum (ETH), Tether (USDT), and Binance coin (BNB).

Although Dogecoin (DOGE) has followed as the sixth top currency, followed by Ripple (XRP), it is impressive that the Dogecoin can still hold its value after the big declining, compared to Bitcoin (the first generation cryptocurrency), Ethereum and Cardano (the second generation cryptocurrency), and Tether as a standard stable coin to peg its value with the US dollar.

Cryptocurrencies in US Dollar termI have retrieved trading transactions in US Dollar term of Ethereum (ETHUSDT, green line), Dogecoin (DOGEUSDT, orange line), Cardano (ADAUSDT, blue line) and Bitcoin (BTCUSDT, gray line) for the last 30 days trading transaction from Binance. From quick glance, according to the performance, we can see that Bitcoin has been damaged the most, Ethereum and Cardano can still be acknowledge the gains, while Dogecoin seems to reap the profit better than the others.

And if we've examined the three Altcoins in term of Bitcoin, it will confirm this trend. However, we will notice that Cardano seems to exceed either Dogecoin or Ethereum.

Altcoins in term of BTCThe above figure will be in line with the returns in different period from our seven sets of cryptocurrencies exchange as follow:

Returns from cryptocurrencies in different periods

From above table, in column#1, if we hold Bitcoin from the last 30 days we will lost at 28.29 per cent, and will lost at 19.74 per cent if we hold it for 5 days. There is no any period in 30 days to gain a profit, if we long Bitcoin. In column#2, Ethereum can generate a profit at 1.38 per cent if we long it for 30 days. In column#3, Cardano's profit will be replaced with loss if we long it less than 15 days. While in column#4, Dogecoin seems to follow Cardano, safe that its loss in term of US Dollar is much more than Cardano.

But if we observe the remaining three column the trading of altcoins in term of Bitcoin, Ethereum (ETHBTC) and Cardano (ADABTC) seem to move in the similar direction. While Dogecoin (DOGEBTC) can perform better than both Etereum and Cardano, albeit it can generate much more profit if we long Dogecoin more than 20 days. This seems to be in line with price manipulation according to Musk's tweets.

As mentioned earlier, because of ability to use as fundamental token in DeFi, Ethereum and Cardano seem to isolate themselves from Bitcoin. But Cardano has weighted its balance between business development and technological development more than Ethereum. Cardano could secure its funding from initial coin offering (ICO) with the opening market cap at USD 600 million. It has used different protocol from both Bitcoin and Ethereum as proof-of-stake protocol called Ouroboros. It has pioneered to build a digital infrastructure for coffee's supply chain smart contract via SMART Africa.

It's impossible that Elon won't take into the account other factors I've mentioned earlier. He measured its potential, and it has passed his criteria. Cardano seems to pave the beauty roadmap, and Dogecoin is ready to go to the next level.

The Third Transformation

Now, the cryptocurrencies have demonstrated their next disruptive power lied in non-fungible token (NFT), prepared by either Ethereum or Cardano. NFT is the next big thing after DeFi.

Most economists have been well acknowledge some standard feature with "digital assets", expensive and difficult to make an investment to produce the first product, but it has "near zero marginal cost" to reproduce other copies. In physical assets, we can identify some anomaly in each copy, albeit how small it is. But we can't do so with digital asset, each copy is total identical. We can't distinguish originality from the reproduced entities. NFT is, however, will enable us to establish originality in any digital asset. Technically, we're imposing "digital twin" with NFT.

A digital art piece in digital museum, originality has been established via NFT

Vignesh Sundaresan, a Singapore-based blockchain entrepreneur with his pseudonym "Metakovan," has bought a digital artwork "Everydays: The First 5000 Days" from the American artist Beeple at Christie’s with value as much as USD 69.3 million in early March this year. He's owned his most assets in digital world, and he intends to display this artwork in digital museum at Metaverse.

NonFungible.com has published its Q1 quarterly report stating that NFT trading performance on Q1 is at USD 2,020,942,331 up 13,118 per cent Y-o-Y or 2,053 per cent Q-o-Q. Market distribution is led by both Colletible (48 per cent) and Art (43 per cent).

It is difficult to comprehend why the younger generation such as "Metakovan" has trusted and made his investment wholeheartedly in digital assets. This young generation won't waste their time to theorizing the phenomenal. They've soaked their life into digital world making money, exchanging their view via discord, and experiment with it as native digital citizen, while the older generation thinkers are trying to bridging their paradigm with "post-modern" concept witness a disrupted physical world.

Elon has mentioned Dogecoin's motto, "to the moon". To completely resolve a problem of carbon footprint in cyptocurrencies, he might think about mining cryptocurrencies in the orbit. This is feasible, since it doesn't take more cost on cargo loading to bring hashrate back to the earth, but communication satellite. In the short run, to fix energy consumption with algorithm is not a bad idea. The explosion of 5G networks and IoT with NFT will help distinguish meaningful "data" to be useful in data analytics. If we equip the next generation cryptocurrency with quantum resistance, it would be perfect.

The instrument to hedging risk and profit in cryptocurrency, according to the mainstreet, is still limit. Majority has perceived Bitcoin as cryptocurrency representative, while stablecoin such as Tether has acted as a real intermediary. In term of cryptocurrency, I recommend to short Bitcoin (BTC-USD), but we can't diversify our portfolio to long with different altcoins easily, as of our discussion earlier on both Ethereum (ETH-USD) and Cardano, albeit the upside is unlimited. Dogecoin has a promising future, but without an unveiling of a robust Musk's commitment and plan, it should be neutral.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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